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Blip, or a new trend?

Long-term investors still exude optimism. Others fear an Asian business downturn. And Alan Greenspan warns of recession.

By HELEN HUNTLEY
Published February 28, 2007

Tuesday was a rotten day for stocks. The Dow Jones Industrial Average plunged 546 points before finishing with a loss of 416.02 points, its worst showing since Sept. 17, 2001, the first trading day following the terrorist attacks.

The trigger was a sudden reversal in Chinese stocks, from Monday's record high to a 9 percent drop Tuesday.

It was the seventh-worst day in Dow history in points, but in percentage terms, the 3.3-percent decline doesn't rank among the major drops.

The Dow closed at 12,216.24. Trading on the New York Stock Exchange was a record 4.3-billion shares.

So what's the story? Was this just a blip or the start of something much more series? Here are two ways to look at Tuesday's news:

 
NOTHING MORE THAN A BAD DAY

Don’t expect Shawn Berg to get excited about a 3.3-percent drop in the Dow. He was so busy working that he didn’t even find out about the decline until it was over. When the news caught up with him, it didn’t bother him a bit.

“I don’t play it like a game,” said Berg, 34, a software engineer at AT&T Labs in Tampa. He said his strategy is to make quarterly adjustments to his 401(k), which he keeps about 60 percent invested in stocks. “I’m in it for the long term.”

That kind of measured approach wins the approval of Clearwater financial planner Ray Ferrara at ProVise Management Group. “If people are just patient,” he said, “they’ll be very happy they didn’t do anything silly like trying to time the market and bail out.” If you get out, the next dilemma becomes when to get back in, he added

“Having a blowoff like this is to be expected and in the long run will be healthy for the market,” Ferrara said.

“We’ve had a very long, sustained upward movement in the Dow since last July and it’s unrealistic to think that the steady increase was going to continue forever.”

Individual investors weren’t bailing out of the market Tuesday, said analyst Rodney Johnson of Tampa’s H.S. Dent Foundation. He attributed the drop to programmed trades, generated automatically when stocks fall to a certain level in order to protect previous profits.

“The market is still doing great,” he said. “Earnings are still doing great.” In fact, he expects the economy to strengthen.

Consumers continue to feel confident, according to the Conference Board, which said its Consumer Confidence Index rose to 112.5, up from a revised 110.2 in January. Analysts had expected the reading to be 109.

The February index was the highest since August 2001, indicating that consumers will continue to fuel the nation’s economic growth in the near future.

The Florida Consumer Confidence Index also rose 2 points in February. “There are competing forces acting on the consumer, and it is still unclear how these will play out in the long term,” said survey director Chris McCarty at the University of Florida. He attributed the strong showing to low gas prices, which are now headed back up, and the stock market’s performance.

“On the down side is housing, the focus of everyone’s attention,” he said.

IT’S 'HEART-ATTACK’ SERIOUS

This is a time to be cautious, says Jeffrey Saut, chief investment strategist for Raymond James & Associates in St. Petersburg.

“The market has had a heart attack and it won’t jump off the gurney and run the 100-yard dash,” he said.

Although Tuesday’s selloff could lead to a short-term rally, “this puts a lid on the market on the upside,” he said. “We continue to have a cautious stance going forward.”

Saut said Tuesday’s big drop in the Chinese stock market had its roots in a change in Japanese monetary policy. Higher interest rates and a rising yen began squeezing hedge funds that had been buying Chinese stocks with money borrowed in Japan. When Chinese stocks started falling Tuesday, hedge funds had to scramble to meet margin calls.

But it wasn’t just Asia that was on investors’ minds Tuesday. Recent reports show the economy may be slowing more than had been anticipated, and former Federal Reserve chairman Alan Greenspan was warning Monday that the United States might be headed for a recession.

“We have had a soft patch of data this month. It shows that the economy is still growing but at a below-average rate,” said Gary Thayer, chief economist at A.G. Edwards & Sons.

The Commerce Department reported orders for durable goods in January dropped by the largest amount in three months.

“Growth in the manufacturing sector ground to a halt in September 2006 and continues to struggle as consumers rethink big-ticket spending and businesses turn risk-averse in their capital spending,” said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

While the National Association of Realtors said sales of existing homes rose in January by the largest amount in two years, it also reported that median home prices declined for a sixth straight month.

Bond prices rose as investors switched out of stocks into Treasuries, perceived as a safe haven. The yield on the 10-year Treasury note fell to 4.47 percent, down from 4.63 percent Monday.

[Last modified February 28, 2007, 08:22:35]